Short-Run Momentum and Book-to-Market Effects

41 Pages Posted: 11 Aug 2011 Last revised: 14 Nov 2013

See all articles by Ming Dong

Ming Dong

York University - Schulich School of Business

Allen Goss

Ryerson University - Ted Rogers School of Management

Date Written: November 1, 2013

Abstract

We present evidence from an event study that runs counter to the notion that the momentum and book-to-market (B/M) effects can be fully explained by time-varying risk premia. We minimize the joint hypothesis problem in market-efficiency tests by examining a relatively short (26-day) window that exhibits both momentum and reversal effects. There is return continuation during the first 17 days but sharp reversal during the last 9 days. The co-existence of strong momentum and reversal over this small event window rules out risk premium or chance as possible causes of momentum, leaving investor misvaluation as the only explanation for this anomaly during this period. Furthermore, several patterns of interaction between B/M and momentum also point to a behavioral interpretation of the B/M effect during the period. The general implication of our evidence is that investor behavioral biases are a necessary ingredient for the explanation of both the momentum and B/M anomalies.

Keywords: momentum, reversal, book-to-market, market efficiency

JEL Classification: G14, G12

Suggested Citation

Dong, Ming and Goss, Al, Short-Run Momentum and Book-to-Market Effects (November 1, 2013). Available at SSRN: https://ssrn.com/abstract=1908007 or http://dx.doi.org/10.2139/ssrn.1908007

Ming Dong (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext. 77945 (Phone)
416-736-5687 (Fax)

Al Goss

Ryerson University - Ted Rogers School of Management ( email )

575 Bay Street
Toronto, Ontario
Canada

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